Cost driver and cost pool are two essential concepts in accounting. The cost driver is a factor that causes the increase or decrease of cost, while the cost pool is a collection of similar costs used to allocate indirect costs to products, services, or customers.
Understanding these two concepts’ differences is crucial for accurately determining the cost of goods sold, product pricing, and customer profitability.
The following paragraphs will discuss the basic definition and concept of cost driver and pool.
Firstly, cost driver refers to the specific activity that causes a change in cost. Cost drivers can be anything from the number of machine hours used to produce a product to the number of employees needed to complete a task.
These drivers are crucial to determining the cost of production, as they provide a direct relationship between cost and output.
On the other hand, cost pool refers to a group of indirect costs collected and grouped to allocate to different products, services, or customers. Indirect costs are expenses incurred in production but not directly tied to a specific product or service.
These costs are commonly used to calculate overhead costs, which are then allocated to products or services based on their specific cost drivers.
It is necessary to allocate both direct and indirect costs to determine the cost of a product or service. Understanding the difference between cost driver and pool is essential to ensure accurate cost allocation and make informed business decisions.
What is a Cost Driver?
Cost driver is a term commonly used in cost accounting, and it refers to an activity or event that triggers a cost within a business. Cost drivers are the root causes behind the costs incurred by a business and help managers identify and measure the costs associated with specific activities.
In the following few paragraphs, we will dive deeper into what cost drivers are and how they are used in cost accounting.
Cost drivers are events, activities, or circumstances that cause a cost to be incurred. This could be anything from the number of product units produced to the number of times a machine is operated or the number of shipments made.
Cost drivers help organizations understand the relationship between specific costs and the activities that cause them. By understanding this relationship, managers can control or reduce costs by improving their processes.
One of the key benefits of using cost drivers is the ability to allocate costs to the activities that cause them accurately. By assigning costs to the activities that drive them, businesses can better understand the costs associated with specific products, services, or processes.
This information is valuable in making informed decisions about which products to continue producing, which to discontinue, and where to focus cost-saving efforts.
Cost drivers also help organizations understand the interconnectivity of costs within their business. By identifying the different cost drivers for different costs, organizations can see how costs are interrelated and how changes to one activity can impact the costs of others.
This understanding can help organizations identify areas for improvement and optimize their processes to reduce costs.
What is a Cost Pool?
A cost pool is a group of costs related to a specific activity or business process. In accounting, it is used to allocate indirect costs to the products or services that cause the costs.
This way, it allows for more accurate and precise cost measurement, making it easier to determine the profitability of each product or service.
For example, a company that operates a factory may have a cost pool for maintenance and repair of equipment.
This cost pool would contain all the costs related to the maintenance and repair of equipment used in the factory. This could include the costs of parts, labor, and any other related expenses.
To allocate the costs in the cost pool, a company needs to determine the cost driver for each cost pool. The cost driver is the activity that causes the cost to be incurred and can be used as a basis for allocating the costs in the cost pool.
For example, if the number of machine hours drives the maintenance and repair cost pool, then the company would allocate the costs in the pool by dividing the total costs in the pool by the number of machine hours.
This would give the company an estimate of the cost per machine hour and would be used to allocate the costs to each product or service produced by the factory.
Cost pools are essential because they allow companies to see the actual cost of each product or service they produce.
By understanding the costs associated with each product or service, companies can make informed decisions about pricing and production processes, which can help improve profitability.
What Are the Similarities Between Cost Driver and Cost Pool?
Cost driver and cost pool are both crucial concepts in cost accounting, and they are used to allocate costs to different activities or products. They aim to clarify the costs associated with specific activities or products and help managers make informed decisions.
One commonality between cost driver and cost pool is that they are both used to allocate costs in an organization. By identifying the underlying causes of costs and allocating them to specific activities or products, companies can better understand the costs associated with each activity or product.
Another commonality is that they both help managers make informed decisions. By clearly understanding the costs associated with different activities or products, managers can decide how to allocate resources and improve profitability.
For example, they may decide to allocate more resources to activities that have a lower-cost driver rate, or they may choose to reduce the costs associated with activities that have a high-cost driver rate.
In addition, cost drivers and pools allow companies to track costs over time. By monitoring the costs associated with specific activities or products, companies can identify trends and make adjustments as necessary to improve their overall cost structure.
Finally, cost drivers and cost pools are used with other cost accounting techniques, such as activity-based and process costing.
By combining these techniques, companies can better understand their cost structure and make better resource allocation decisions.
What Are the Differences Between Cost Driver and Cost Pool?
In accounting, cost drivers and cost pools are used to allocate costs. While they may sound similar, they refer to distinct concepts that play different roles in cost accounting.
A cost driver is a factor that causes a change in the cost incurred. For example, the number of machine setups in a manufacturing process can be considered a cost driver, as the cost of each setup affects the overall cost of production.
Cost drivers are used to allocate indirect costs to the products or services that caused them.
Cost pools, on the other hand, are groups of indirect costs that are accumulated and then assigned to cost objects using a cost driver.
For example, the indirect cost of a manufacturing plant may be grouped into different cost pools, such as maintenance, utilities, and supplies. Each cost pool is assigned to a cost object based on the relevant cost driver.
In practice, cost drivers and pools are used together in cost accounting. The cost driver determines the proportional amount of each cost pool to be assigned to a particular cost object, while the cost pool is used to gather the costs being assigned.
The combination of cost drivers and cost pools is used to allocate indirect costs more accurately and meaningfully than simply assigning costs based on a simple formula.
By understanding the differences between cost drivers and cost pools, companies can better allocate costs to the products and services that incur them, leading to improved decision-making and profitability.
This is why a deep understanding of the relationship between cost drivers and cost pools is critical for cost accounting and financial management.
Conclusion: Cost Driver Vs. Cost Pool
In conclusion, the distinction between cost driver and cost pool is essential in accounting.
Cost drivers are the underlying causes of cost production and help to identify the actual cost of products, services, and activities.
On the other hand, cost pools group together related indirect costs and allocate them to cost objects through a cost driver.
Understanding these two concepts’ differences is essential for proper cost accounting and decision-making. It allows businesses to allocate costs accurately and make informed decisions based on the actual cost of their operations.
Using cost drivers and cost pools, businesses can better understand their cost structure and make informed decisions about pricing, cost reduction, and resource allocation.
